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IS IT TIME TO GET ROTHIFIED?

| October 28, 2019
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One of the rare gifts we have in the tax code is the ROTH IRA. However, you and your family may not be using ROTHs to the fullest advantage.

What’s so great about a ROTH IRA or ROTH 401(k)? Mainly that ROTH money grows tax-free, and in many cases, can be taken out tax-free.  Another advantage that retirees enjoy is that the IRS does not require Required Minimum Distributions (RMDs) at age 70 ½ from ROTH IRAs.

Many employers now offer a 401(k) ROTH option in addition to the widely used pretax-Traditional contribution option.  The biggest benefit to a ROTH 401(k) is that there is no income limit on deferrals into ROTH 401(k)s unlike ROTH IRAs, which are subject to an income ceiling for singles of $122,000 in 2019 ($124,000 in 2020) and for married filing jointly $193,000 in 2019 ($196,000 in 2020).

Other ROTH perks include:

  1. Tax-free in and tax-free out. Take out Roth IRA contributions at any time, for any reason, at any age, without having to pay taxes or penalties. 
  2. Enjoy penalty-free withdrawals to pay for higher education expenses for you, a spouse, children, grandchildren and great-grandchildren.
  3. Another penalty-exemption is for first-time home buyers as long as you (and your spouse, if married) haven’t owned a home during the previous two years. 
  4. You must use the money to buy, build or rebuild a home. Note, there’s a $10,000 lifetime cap, so it’s a one-time deal for most. According to IRS rules, you can also use the money to help out a child, grandchild, or parent who meets the first-time homebuyer definition.

What are “Qualified distributions”? Tax-free and penalty-free withdrawals. The IRS considers a distribution “qualified” when an account meets the 5-year rule and the withdrawal is:

  • Made on or after age 59 ½ 
  • Taken due to your disability
  • Made by a beneficiary after your death
  • Used to buy, build, or rebuild your first home

Avoid common missteps on distributions that can become “non-qualified distributions”, which are subject to taxes on earnings plus a 10% penalty. You may not have to pay the 10% penalty if one of these exceptions applies

  • The distributions are part of a series of substantially equal payments (minimum five years or until you reach age 59 ½, whichever is longer).
  • You have unreimbursed medical expenses exceeding 10% of your Adjusted Gross Income (AGI). 
  • You’re paying medical insurance premiums after losing your job.
  • The distributions are not more than your qualified higher education expenses (for you or eligible family members).

If at least five years have passed since your ROTH was opened and contributed to the withdrawals count as qualified distributions. That’s true regardless of your age when you opened the account. You can make penalty-free withdrawals at age 59 ½, for instance, but if you were 57 when you made your first contribution, you’d need to wait until age 62 to withdraw earnings.

Talk to your financial advisor to see if you should get ROTH-ified  and if a ROT is right for you so you can start rocking your tax-free investment growth well before you plan to retire.

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Contact Jayne W. Di Vincenzo AIF ®, CEP ®, President, Lions Bridge Financial Advisors at

757-599-9111 (T)   Jayne@LionsBridgeFA.com and visit: www.LionsBridgeFinancial.com

2110 William Styron Square S. Newport News, VA 23606

483 McLaws Circle #3, Williamsburg, VA 23185

2396 Liberty Way, Suite 115, Virginia Beach, VA 23456

Tax laws are subject to change at any time and may impact the current benefits of ROTH IRAs, please consult your tax advisor regarding your specific situation. Lions Bridge Financial Advisors nor LPL Financial provide tax or legal advice. Please consult with your tax or legal advisor regarding your specific situation.   Securities and advisory services through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. 

All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.   Jayne holds her Series 53 Municipal Principal, 24 Securities Principal, Series 7, State 65, 63, and Managed Futures 31 registrations with LPL Financial.  

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